German business sentiment rose unexpectedly for the fifth month in a row in March, signalling that Europe's largest economy is proving more resilient than others to the euro zone debt crisis.
The Munich-based Ifo think tank said on Monday its business climate index, based on a monthly survey of some 7,000 companies, rose to 109.8 in March from a revised 109.7 in February.
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The closely-watched Ifo index bucked expectations for a steady reading and rose to its highest level since July 2011, just days after data showed the first contraction in German manufacturing this year.
"German Ifo: is the sky the limit?" said Carsten Brzeski, economist at ING in Brussels. "The strong labour market, filled order books and low inventories still bode well for growth in the coming months, albeit at a low level."
The euro rose briefly against the dollar and German Bund futures pared gains on the data.
The German economy has gone from strength to strength since emerging from the 2009 financial crisis, interrupted only by a slight contraction in the last quarter of 2011 when the debt crisis spread further through the euro zone.
Economists say that was a blip, prompting some think tanks to raise their growth forecasts. IWH Halle institute expects the German economy to grow by 1.3 percent this year, almost twice the government's forecasts for a 0.7 percent expansion.
But the rise in business sentiment was not as broad-based as in recent Ifo surveys - the mood worsened slightly in all branches except retailing. Manufacturing, construction and wholesaling were more downbeat, though manufacturers told Ifo they expected "positive impulses from export business".
RISKS IN OIL, INFLATION
Last week, data showed that the manufacturing sector had shrunk for the first time this year, raising concerns over Germany's resilience to the debt crisis and prompting some to conclude that growth expectations may have been overstated.
Despite the rise in the Ifo reading, there are risks to growth. Ifo economist Klaus Wohlrabe told Reuters that inflation and high oil prices may be a threat to firms.
"That's not visible yet in retail," said Wohlrabe. "But you can feel it in wholesale. It's not a big danger yet for companies, but it's a potential risk."
And economists said the pace of growth could slow.
"We don't expect the German economy to have contracted again in the first quarter," said Commerzbank economist Joerg Kraemer. "But recent mixed data suggest that there's a limit even to the strongly competitive German economy."
An Ifo sub-index on current conditions remained steady at 117.4 and a reading on expectations rose slightly to 102.7, less than in previous months, prompting Ifo to say the economy was losing some of its momentum.
With the euro zone due to contract this year, a downturn in export markets may hurt German growth.
"Even at a slower pace, the German economy should remain the euro zone growth showcase of the year," said ING's Brzeski.
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